In this time of government austerity, can you think of a crazier idea than making a gift of $8 billion to the nation's banks and savings associations? If so, please send it to your congressman. It could easily be passed into law right with the $8 billion giveaway to the banks and thrifts.
Giveaway is surely the right word, unless you prefer bail-out. This measure would make the $15 billion loan guarantee to Chrysler Corp. look like small change. And yet Congress is warming to the notion with almost unbridled enthusiasm. Without much serious debate, the Senate Finance Committee included this private relief measure -- called the All Savers Act -- in its tax legislation. The House Ways and Means Committee has adopted a similar measure.
If nothing else, its popularity demonstrates how welfare dependency can apply to business. Few industries have been as dependent on government protection as savings associations, this bill's main promoter. (Banks were included only to neutralize their opposition.)
Over the years, layers of federal regulations have insulated the thrifts from new economic realities. Now, at the first sign of trouble and danger, the thrifts' conditioned response is to seek more government favoritism.
The All Savers Act is their latest plea for help. Under it, taxpayers would be allowed to exclude from taxable income $1,000 worth of interest ($2000 for couples) earned on a deposit in a bank, savings association or credit union. The special tax-free, one-year accounts could bear up to 70 percent of the market rate of interest, which is defined as the rate of a one-year Treasury bill.
At the current Treasury bill rate of about 14 percent, that would mean an interest rate of about 9.8 percent. Deposits could be large. A 10 percent interest would support a $10,000 deposit for an individual and $20,000 for a couple. The U.S. League of Savings Associations estimates that about $200 billion would shift into these tax-free accounts; savings associations would receive roughly half.
The interest rate savings would represent a substantial windfall for thrifts and banks. On $200 billion, the difference between 9.8 percent and 14 percent is worth about $8.4 billion. Meanwhile, the government would lose tax revenue. The Treasury Department puts the loss between $4 billion and $5 billion.
The savings associations have shrewdly promoted this measure. They know that Congress and the public frown upon outright subsidies to business, and so this proposal masquerades under the more respectable label of "savings incentive." The savings associations also know that Congress responds to fear. So the thrifts are quietly arguing that they desperately need help to spare them from ruin.
Their fundamental problem is that they lend long -- mostly in the form of home mortgages -- and borrow short. High interest rates mean that their deposit rates now generally exceed the earnings on their $500 billion mortgages portfolio, in large part because roughly two-thirds of those mortgages carry interest rates below 10 percent.
But none of this means that the thrift industry is on the brink of collapse.
It has substantial reserves from previous profits ($31 billion at last count) to absorb losses. Public faith in federal deposit insurance, now up to $100,000 on individual accounts, is sufficiently strong to forestall panic withdrawals.
Moreover, the tax system already has a built-in mechanism to help ailing institutions. They're allowed to apply their current losses against past taxes and receive federal rebates. In 1981, the Savings and Loan League estimates that such refunds will total $2.1 billion.
What explains the thrifts' enthusiasm for the tax-free accounts is their steadfast determination to resist new forms of competition. The immediate threats come from the money market mutual funds and large financial institutions (mostly banks but some savings associations, too) that want to open branches nationwide -- something they're now effectively prevented from doing.
The tax-free account would represent formidable, if subsidized competition for the money market funds. For someone in a 40 percent tax bracket, a 10 percent tax-free account is worth a taxable interest rate of about 16.7 percent.
Likewise, shoring up weak thrifts through these subsidies takes pressure off Congress to breach the current barriers against interstate banking. The most pressing argument for removing these restrictions is to allow healthy banks to buy weaker thrifts and banks in other states. That's a less expensive way to relieve the pressure on the federal deposit insurance agencies to rescue the weakest institutions at considerable government cost.
But Congress seems either oblivious to these connections or disinterested. It has been an easy mark for the pitches of the savings associations ever since 1966, when the thrifts requested interest rate ceilings for their own deposits and those in banks. In a period of rising interest rates, the ceilings prevented banks from bidding away deposits from thrifts. In fact, the ceilings actually discriminated against the banks.
By temporarily taking pressure off the thrifts, this expedient allowed both Congress and the industry to evade the basic problem: matching interest rates on mortgages and deposits. Congress didn't want to allow variable-rate mortgages, whose rates fluctuate with changing conditions, because they were considered unpopular. And the thrifts liked their favored status.
In the end, protection failed. Depositors evaded the below-market interest ceilings by investing in Treasury securities or money market funds. And the ceilings themselves came to be viewed as anticonsumer. Congress has now permitted variable-rate mortgages and decreed that all remaining ceilings be phased out by 1986.
The history is instructive. The All Savers Act won't prevent fundamental changes, but it may delude the savings associations into thinking they can avoid change. The current bill would allow the tax-free accounts for only one year, but can you imagine the pressures for extending it when banks and thrifts receive a couple of hundred billion in low-cost deposits?